The Chefs' Warehouse, Inc. (CHEF) Earnings Call Transcript

All right. I think we're ready to get started here with the next presentation. Kelly Bania, food retail and distribution analyst here at BMO Capital. I do want to thank Chefs' Warehouse for participating in Farm to Market again this year. I can just only imagine how busy management teams across all parts of food, consumer and retail are right now. And so I do appreciate you taking the time and hope that all of you and your employees continue to stay safe and well. With that, there's definitely no shortage of topics to cover. So I do want to first introduce Chris Pappas, Chairman, Founder and CEO of Chefs' Warehouse; and Jim Leddy, CFO. Thanks for joining us. Hopefully, you can hear me okay.

We can hear you, Kelly. Thanks for having us.

Thanks, Kelly.

Great. So I guess might as well start out with the news from this week and equity raise. Can you just help us understand the thought process there, what those funds will be kind of earmarked for? And we'll just start with that.

Sure. So it was a very hard decision because we felt we were pretty well capitalized. We actually built a cash position since the pandemic hit, and we pivoted a lot of our business, we cut our expenses. And we looked at the next 12 months sort of with a draconian outlook, and we thought we were fine. But what we started to see was a lot of our competition that closed down, we started to get messages that some would not be opening, and then we saw another pretty large independent who didn't have a strong balance sheet get into trouble. And we started getting a lot of salespeople wanting to join us and wanting to bring a book of business and some wanted to bring new category expertise and start new divisions. So it was kind of like buying companies without buying them, picking up experienced people with the business and the people that actually ran the business. And a lot of these businesses, say, it was a $200 million company, maybe there was $100 million of business that we were really interested in, and the other half, not. And we started seeing the opportunity of starting to pick up more market share in some of the major places that we do business in and a lot of talent. And we made the hard decision and said, not only do we want to be bulletproof, but we wanted to be able to play offense really without having to write a check for a business and building categories and building really profitable new customers for when the sun comes out again and feel comfortable doing it. And that's kind of what inspired us to go ahead and do a -- just add some more money to the balance sheet.

Okay. And can you help us understand what you are seeing with some of those smaller competitors? I mean I would assume they're experiencing similar kind of declines and are taking similar actions to cut costs, but what -- can you elaborate just there? There's so many competitors there in a lot of your markets.

Sure. Yes. A lot of them just closed because they didn't -- they would be losing money, their business really didn't have any diversity to it, so many won't open. I mean it's horrible to say, but a lot of these small businesses, either they had leverage or just didn't have the capital to withstand this and to reopen and then have to open and give credit to customers as they started to reopen on the restaurant side. So it's tragic in many ways, but for us, it's kind of a little silver lining that we can add a tremendous amount of new customers when this thing hopefully burns off. And especially as they start to open now, 25% and then hopefully 50%, that starts to become profitable business to us. It's kind of like the Wild West. A lot of people that join us understand they can't go back to where they were as far as pay, so we give them the commission-based or some sort of base. And even owners that want to merge with us, we saw the opportunity to use our balance sheet to start to bring them in as business opens with kind of like a coupon. When the business hits x dollars of EBITDA again, they can get some equity out of it. And I think it's going to be -- it is and it's going to be very appealing to people that don't have a lot of choices and not a strong balance sheet to get through this until next year.

Can you, in any way, quantify how many new customers you're taking on in that regard?

I think it's early, but it's anything -- if I had to throw a number on there, I think it's going to be quite substantial by the time this is over.

And I guess going back to kind of the sales. So sales, I think when you reported last week, it sounded like they were maybe down 50 to 60, I think, some weeks were getting better. But can you help us break that down and understand the drivers of improvement from the trough? So was it just your customers doing more takeout and delivery, you also have your direct-to-consumer initiative, states opening back up? But just help us think about what drove that and how much of that was existing customers just opening up. And are there still -- what percent of your customers are still closed? Just help us really kind of underneath the hood of what's happening.

Sure. Yes. Well, obviously, when this thing -- when the whole country went on lockdown, I mean, you couldn't get lower than that point. So that was the low point. And I think many people thought that this thing could blow over in a month, so they just stayed closed. And I think the reality was that this was going to be a long haul back. And especially now every week, more and more customers are opening, especially the cities that are allowing actually in-dining. So we're going to start to see the benefit of that. But really, the buildup has been the entrepreneurial spirit of a lot of our independent restaurants and big groups. They started to become little general stores, started to sell a lot of our -- especially on the protein side, a lot of our meat kits, family kits along with some takeout. We thought it really flourished in the partnerships where we have. So I think the notion that Chefs' was only fine dining was kind of misleading. Our sweet spot really was upscale casual. So we do a lot of clubs, we do a lot of takeout places, and we have a lot of retail relationships. So obviously, retail has been overwhelmed those channels, and that business flourished. So customers really high-end, supermarket chains and gourmet groups that might have been buying x amounts started buying a lot more from Chefs', especially on the protein side that we have the facilities and the ability to cut steaks and grind hamburgers, and that's going to be what people are eating right now as comfort food. So that channel really blossomed over the last 4 weeks. Our B2C, we pivoted, we realized the demand from our customers' customers, from e-mails and blogs and texts that could they buy products -- the same products that they were used to eating in their restaurants. So we kind of partnered with a lot of our customers and accessed their customer list, e-mail list, and all of a sudden, we had a flourishing home delivery business, which we continue to build upon. And we started to promote on social that you could buy a limited amount of our products, especially the meat kits. If you got online, use your credit card, we developed the website. And we started having trucks in certain neighborhoods for certain hours. And that business started to flourish, people that didn't want to go to the store or wait online on Costco. So we started to see a real opening to build something that we always thought we would build. We thought maybe we would start with outlet stores, Shop Like a Chef. We never really got to it because we've been so busy the last 5 years with acquisitions and new projects and computer upgrades and new categories. So what better time to start a new business than during a pandemic, right, when most of your customers are closed. So incredible talent in the organization. Obviously, we know food. And we wanted to stick to what we did best, which was really upscale casual food to high-end food, and we started selling Kobe steaks and wagyu and prime and lots of chicken and olive oils. And I never thought we would be the king of foie gras, olive oil, prime beef and toilet paper. But having warehouses full of groceries and dairy products has kind of developed a really great opportunity for people to shop a high -- a really pretty -- especially in the Metro New York area, which is really where we focused on, you can almost get everything you need without going to the store. You could supplement it with other online deliveries, but you can get a lot of your groceries, your dairy, everything to cook a meal, a lot of our raviolis from Italy and on and on and on without leaving your house. And that's really -- we think it's a great little business, and we think it's going to continue and really grow. We're partnering with companies that sell freezers. Everybody is buying a freezer that has a garage and didn't have one before, and we think that they really appreciate it. We have over a 50% return rate to customers. So we just have to start -- continue to build more customer base and running it out of our existing facilities, utilizing the labor. Right now that we have that excess capacity and the capacity on the trucks in the ZIP codes where we deliver, it's developed into a nice niche additional business of Shop Like a Chef.

I mean maybe it's too early days, but I mean what component or what percentage of your business do you think that could be longer term?

That's really hard to say. Right now, we're still -- Rome is burning. But I would give you my first goal. You got to put a goal on something. I think our first goal is get this like $200 million would be a nice little business in addition to what we do on our B2B at really good margins. So I think it would be a great complement, and it's a great first goal.

Okay. No, that's helpful. I guess going back to your kind of core customers, though, what -- how many of them -- or what percent of them have established takeout and delivery programs? How many more could ramp those up in the coming weeks and months? Just any color on how they're dealing with that and what they're doing to their menus process.

Sure. Yes, well, everybody has simplified their menu, so very few people have a complete takeout menu because they haven't brought back their staff. So everyone from a very small family business that is really family-run with a few extra people able to put out enough to make a living right now to some of our more sophisticated larger customers who have gotten really incredibly entrepreneurial with -- especially now with Mother's Day and Father's Day coming up and Memorial weekend, they're doing complete meals to go, cooked or uncooked, making it really simple for families to have a really celebratory meal. And I think during the week of what I see and what I'm experiencing is lots of sushi, lots of pizza, lots of lasagna, lots of spaghetti and meatballs, lots of home meat, very comfort food-oriented. They're doing special nights. I had a date night the other night where it was a lot more sophisticated and what we're used to eating in a more upscale restaurant. So we're seeing it all over the place, a lot of entrepreneurial-ship, a lot of proteins and a lot of pasta.

Do you know -- I don't know how many -- what percent of your customers are doing this takeout and delivery programs on their own, or are they working with the aggregators? How does that -- how could that change? Does it matter?

I think a lot of it -- I mean, it's probably all over the place, but what we're really seeing in every day, more customers are opening, so either they're getting ready for the 25% opening. It's a good way really to kick-start their business and -- except for the really super high-end, who are usually partnered with either wealthy investors or wealthy real estate people. Most of the super high-end is in luxury buildings or hotels, and they have a different deal. And most of them are just sitting this thing out. We've seen that before. So I would say the core of our business, the predominant amount of the 47,000 customers we have, every day, more and more will continue opening. And takeout is from, like I said, very simple menu to somewhat getting more ambitious. And what we've really seen and we're excited about is the outdoor dining, which people feel a lot more comfortable sitting outside. So we've seen streets closed in Naples, we've seen customers putting tables outside, customers renting tents. I'd like to be in the tent and the outdoor heater business right now. I think that's going to be a boom. Anybody that can is putting up a tent. A lot of our country clubs are expanding their outdoor dining to accommodate a vast amount of people. As this thing opens up more and more, they think their customers are going to feel more comfortable sitting outside space, either with a tent or without, as the weather gets better, obviously, without a tent and, at the time being, with heaters. So we're seeing an incredible amount of entrepreneurship taking place around the country.

It's a good point on the seasonality and the ability to kind of eat outside in the summer months. Anything else in terms of seasonality that we should be thinking about in this environment as we move through the next couple of months?

I just think you'll continue to see more and more people open. I mean me and Jim have really modeled this thing pretty draconian as a worst-case scenario and how Chefs' is profitable and rides this thing out until there's a vaccine or the virus burns itself out as viruses do. So I think we're going to see tremendous amount of these places doing barbecue in front of their places, they're ordering new barbecue setups. Because as much as we love to cook at home, a lot of people are really busy, and the demand is starting to go the other way. Obviously, people will cook, and we're glad to supply those products to their home. But I think takeout is really -- it was accelerating before COVID. And I kind of think this is kind of the Amazon effect on retail, the B and C malls that were going to fail anyway. I think this has accelerated takeout. So I think that our model right now is we're 40% to 50% without our customers really having in-house dining. Even if we got 25% of the business back in addition to where we are now, we're in a position to ride this out and be profitable. And with all the additional people that are going to join Chefs' and divisions that we see coming on, we think we'll do okay and focusing really on how do we hit it out of the park end of '22 and into '23 being a much larger, more diverse company with really profitable divisions and filling out some of the categories that we were missing.